Christine Lagarde says coronavirus yet to cause ‘long-lasting shock’ - Financial Times

Christine Lagarde has played down the chances of the European Central Bank providing an imminent response to the spread of the coronavirus, which has prompted economists to slash their eurozone growth forecasts.

The ECB president told the Financial Times the central bank was monitoring the outbreak “very carefully” but said it was not yet at the stage where it would have a lasting impact on inflation and, therefore, require a monetary policy response.

Ms Lagarde’s comments indicate that the central bank is hoping to keep interest rates on hold when it meets to discuss monetary policy in two weeks, despite calls from economists on it to cut rates and step up its bond purchases.

The policymaker said the bank would have to determine whether coronavirus was set to cause a “long-lasting shock” that would impact supply and demand as well as inflation. “But we are certainly not at that point yet,” she said.

This cautious stance by the head of the ECB, which has kept its deposit rate unchanged at minus 0.5 per cent since a cut last September, could disappoint investors who are hoping for a further monetary stimulus to stem a sharp sell-off in financial markets.

The Stoxx Europe 600 fell as much as 3.5 per cent in early afternoon trading on Thursday, leaving it down just over 10 per cent from the record high it reached over a week ago.

“It is a fast-developing phenomenon which requires that we monitor very carefully,” said Ms Lagarde. “It is clearly not an area where a central bank has actually an opinion. It is really for the health service and health experts to give us their take . . . on the evolution and particularly importantly on containment.”

Ms Lagarde said all of the bank’s base-case scenarios are “based at the moment on containment in reasonably short order”.

“I was very pleased to see that the numbers in China on deaths relative to contagion seem to have declined for the third or fourth day, which seems to indicate that there is a degree of improvement,” she added.

Economists fear that the impact of the virus will continue to disrupt global supply chains and compound the woes of European manufacturers, which have suffered two years of falling orders and production. They also worry the health crisis could weigh on weak growth in the eurozone, which last year fell to its lowest level in seven years.

Bank of America cut its forecast for eurozone growth this year from 1 per cent to 0.6 per cent, while Credit Suisse cut its projection from 0.9 to 0.5 per cent.

Italy, where the outbreak is the most severe outside China, urged Brussels on Tuesday to offer flexibility on its budget targets should the country’s sudden coronavirus outbreak in its industrialised northern regions have a prolonged impact on an economy already teetering on edge of a recession.

Peter Altmaier, Germany’s economy minister, promised on Thursday to come to the aid of the country’s companies hit by the disease. The government had “various subsidies and grants that are available to companies to bridge short-term liquidity needs”, such as export credit guarantees and loans from KfW, Germany’s state-owned development bank, he said.

There was so far no evidence that the virus outbreak had led to any supply bottlenecks or affected demand in Germany itself, Mr Altmeier said, but his ministry was nonetheless closely monitoring the situation. “I can’t exclude an impact on our growth forecasts, but it will be manageable,” he said.

There was now an argument for bringing forward some reforms that had already been agreed by the German cabinet to improve conditions for companies, he said. These included changes to tax depreciation for companies acquiring digital products, and preferential tax treatment for business partnerships. The measures did not amount to “a stimulus in the classic sense, which would in any case have only an ephemeral effect,” he said.